As market and social forces continue to tighten around the biopharmaceutical industry, drug companies need to start evolving toward a new business model that both capitalizes on the potential of new technologies and accommodates society’s demands for better, cheaper drugs that are broadly accessible.

This means laying the groundwork for what would be the industry’s third business model in nearly 40 years.

From the late 1970s, when Smith, Kline and French’s heartburn drug Tagamet cimetidine began its march to the $1 billion sales threshold, the biopharmaceutical industry was dominated by the blockbuster model. This aimed to create billion-dollar products through moderately priced drugs for high prevalence diseases that represented major unmet needs, such as hypertension, gastric ulcers and depression. Market access was accomplished by huge detail organizations that competed to persuade physicians to select among drugs that were often therapeutically similar.

Figure: Top causes of death go wanting

Of the top 10 causes of death tracked in the U.S. by CDC, only cancer has received significant numbers of drug approvals. In 2008-17, the other areas garnered 52 drug approvals combined, while cancer collected 75. Diabetes and heart disease tied for second, with 13 each, while Alzheimer’s disease had none. The last new drug for AD was approved in 2003. BioCentury classified indications of new molecular entities and new biologics into each top cause of death as described by CDC, which are shown in order from left to right. The self-harm category includes antidepressants and antipsychotics. Three drugs were double counted due to approval for both heart disease and stroke prevention. The No. 4 cause, “accidents (unintentional injuries),” is omitted. The CDC list is from 2015, the most recent year for which its data are available. Source: FDA, CDC website, BioCentury analysis

In the 1990s, when many of the supposedly low-hanging fruit targets were harvested, and a robust generics market created patent cliffs, the pursuit of blockbusters began to be replaced by the specialty model that sought to treat very rare diseases with high priced drugs. Market access was accomplished by smaller, targeted sales forces.

The specialty model accelerated with the advent of targeted therapies that serve defined, small populations, especially in cancer. Meanwhile, market access increasingly was accomplished by negotiations to list drugs on formularies managed by a handful of gatekeepers.

Figure: Slow to compete

The specialty drug business model has disincentivized creation of second-in-class products compared with the heyday of the blockbuster era. In testimony to Congress, FDA Commissioner Scott Gottlieb stated that 41% of first-in-class products approved to treat non-orphan disease in 1991-2000 had a competitor in the class within five years. That shrank to 18% of products approved in 2001-10.

For products approved in 2011-13 that have been on the market at least 5 years, BioCentury’s analysis found that 27% have a competitor. Whether this represents a reversal of the trend remains to be seen, but the average time until a competitor was approved in this group was 1.8 years. The shortest window was the 10 days between the approvals of HCV drugs Victrelis boceprevir from Merck & Co. Inc. (NYSE:MRK) and Incivek telaprevir from Vertex Pharmaceuticals Inc. (NASDAQ:VRTX) and Johnson & Johnson (NYSE:JNJ), drugs that became obsolete less than three years later.

By comparison, Gottlieb said, “nearly a quarter” of the 1991-2000 cohort had a competitor within two years; for drugs approved from 2011 through mid-2016, 20% had a competitor within that time.

For orphan drugs for non-cancer indications, the rate of products with competitors within five years fell from 26% to 18%. Here again, the small cohort of products approved since 2011 with 5 years on the market has improved, but at 18% still lags the earliest cohort. Source: FDA testimony, FDA website, Health Affairs, BioCentury analysis

This year, the 26th Annual Back to School essay asks whether the Biopharma 2.0 model can survive in the face of mounting external forces that demand the industry’s attention, and identifies where first movers in the industry are seeding the model for Biopharma 3.0.

The situation

For the moment, the answer is that the specialty model is not dead yet. Back to School’s outreach to industry and financial stakeholders finds many voices arguing that industry can confidently stay the course. Some say indefinitely.

But Back to School argues drug companies and their investors can’t be complacent while the healthcare ecosystem changes around them. It’s possibly premature to draft the blueprint for the next business model, but there can be little dispute about the drivers of change.

Market forces are pounding nails in the coffin of the industry’s ability to impose prices. Their influence has finally extended into the government-pay setting in the U.S., which has set its sights on the arcane rebate system that enables drug companies, PBMs and payers to profit, even while patients see rising co-pays.

Society wants multisource options for treatments -- even if they are cures -- because competition between drug companies brings the price of innovation down. This means “best in class” is about cost-effectiveness.

Figure: Expense horizon

A surge of products based on new modalities is likely to hit the market in the next few years. Many of them are designed for one or a few doses, which the current business model is not designed to address. At least 40 of these products are in Phase III testing or registration worldwide. Several treat orphan disease such as hemophilia, but others address more common conditions such as heart failure, inflammatory bowel disease and several types of cancer. “Other” cell therapies include an autologous gene-corrected cell therapy and a hepatocyte based cell therapy. AAV = adeno-associated virus; Source: BCIQ: BioCentury Online Intelligence

Society also wants drugs to go generic as soon as their patent lives end. Tolerance of patent extension schemes has reached a breaking point.

Most important, at the societal level, it has become obvious the specialty Biopharma 2.0 model is spending more money to gain smaller and smaller increments of improved healthcare as each new, expensive drug serves only a small number of patients (see “Figure: Population Decline”).

Figure: Population decline

In the shift from the blockbuster era to the specialty era, drug developers turned to targeting fewer and fewer patients for each drug they produce, which is evident in the drop in average population size for new drugs approved by FDA over the past 25 years. BioCentury analyzed the patient populations for therapeutic new molecular entities (NMEs) or new biologics approved by FDA since 1992 by counting prevalence for chronic diseases, or incidence for cancer or acute diseases such as bacterial infections. Incidence was also used for ultra-orphan diseases for which only estimates of birth incidence were available. The average population size per drug was more than 20 million in 1995, but has been below 10 million every year since 2004, falling below 5 million three times. Data include the first indication approved for NMEs and new biologics reviewed by the Center for Drug Evaluation and Research (CDER) and exclude OTC drugs, adjuvants, diagnostic agents, and drugs approved to treat or prevent bioterrorism threats and for neglected tropical diseases and cosmetic uses. For drugs approved simultaneously for multiple indications, the sum of the populations was included. For cancer drugs targeting specific mutations, incidence of those mutations was used; otherwise overall incidence of the cancer was used regardless of line of therapy initially approved. Source: FDA website, BioCentury analysis

To the individual patient, of course, the improvements are profound. But, as measured against GDP, everyone knows the rate of spending is unsustainable.

Pressure to end patent extension schemes mean a product’s ROI will need to be achieved within a drug’s patent life, as the original bargain with society intended.

Given the pace of scientific progress, many products will have far less time to earn returns.

Taken together, these forces point to a world where drug companies will command lower lifetime revenues on individual drugs.

The path forward

If this is all true, then drug companies and their investors will be asking what can be done to replace Biopharma 2.0.

The real question is even broader: what will supplant today’s healthcare paradigm?

In the long term, Back to School sees the healthcare world moving beyond “outcomes” to “solutions” where the value-for-money calculus will be redefined in terms of the population’s health.

In the emerging ecosystem, healthcare is headed towards delivering comprehensive solutions for patients that go well beyond the therapeutic itself.

This is not the earlier incarnation of a “solution” being a drug plus three follow-up phone calls and a helpline. Rather, it is a therapy, defined by a diagnostic, coupled with an app or wearable digital technology that continually monitors both patient compliance and the drug’s effect and adjusts the treatment accordingly, much like today’s closed-loop insulin pumps.

It aims to increase adherence, allows for earlier intervention, and encompasses prevention as a realistic goal.

In this case, it’s reasonable to bet the Biopharma 3.0 business model will be built across the healthcare continuum.

This means moving beyond negotiations for formulary access for a new therapy to the design of solutions that improve the health of patients for both the immediate and long term across the care pathway.

Reimbursement will no longer stop and start at the delivery of a pill but will require that a medicine or diagnostic works to keep patients out of the hospital or prevents the disease from manifesting in the first place.

This model will recognize that patient outcomes are inextricably linked to diagnosis, risk management, behavioral counseling, diet and other supportive elements in the care continuum.

Back to School argues that drug companies can build both shareholder and social value by seeking new business opportunities at...